Measuring Market Expectations

Christiane Baumeister

No 29232, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Asset prices are a valuable source of information about financial market participants' expectations about key macroeconomic variables. However, the presence of time-varying risk premia requires an adjustment of market prices to obtain the market's rational assessment of future price and policy developments. This paper reviews empirical approaches for recovering market-based expectations. It starts by laying out the two canonical modeling frameworks that form the backbone for estimating risk premia and highlights the proliferation of risk pricing factors that result in a wide range of different asset-price-based expectation measures. It then describes a key methodological innovation to evaluate the empirical plausibility of risk premium estimates and to identify the most accurate market-based expectation measure. The usefulness of this general approach is illustrated for price expectations in the global oil market. Then, the paper provides an overview of the body of empirical evidence for monetary policy and inflation expectations with a special emphasis on market-specific characteristics that complicate the quest for the best possible market-based expectation measure. Finally, it discusses a number of economic applications where market expectations play a key role for evaluating economic models, guiding policy analysis, and deriving shock measures.

JEL-codes: C52 E31 E43 E52 G14 Q43 (search for similar items in EconPapers)
Date: 2021-09
New Economics Papers: this item is included in nep-cwa, nep-isf and nep-mac
Note: AP EEE ME
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.nber.org/papers/w29232.pdf (application/pdf)

Related works:
Working Paper: Measuring Market Expectations (2021)
Working Paper: Measuring Market Expectations (2021)
Working Paper: Measuring Market Expectations (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:29232

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w29232

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().